Clients and third party administrators generally outsource tasks and services, such as information technology (IT) services, to an outside company (a supplier or service provider) that specializes in that type of work. The services performed by the service provider for a particular client may change from year to year, but there are often scopes of work—which may be relatively large—that do not change much from one year to the next or that are very similar to a scope of work performed by the service provider for another one of its clients.
Consequently, over time, the service provider would be expected to perform a particular scope of work more efficiently and economically than it did in the past. Furthermore, a client might expect to share in any of the service provider's productivity gains in the form of reduced prices.
However, measuring and demonstrating productivity gains can be difficult. In particular, it is difficult to predict productivity gains for an upcoming service period. Service providers may commit to refunding a portion of their charges after a workscope is completed if they can perform that workscope more efficiently or economically than was anticipated when that workscope was priced. However, a service provider that can predict productivity gains in advance of performing the work would have an advantage over its competitors by virtue of being able to offer a lower upfront price (instead of a potential refund), thus allowing their clients to realize a cost-savings sooner rather than later.